From fretting takeovers to vetting CFIUS: finding a balance in U.S. policy regarding foreign acquisitions of domestic assets

Vanderbilt Journal of Transnational Law, Oct, 2006 by Gaurav Sud

ABSTRACT

Merger law in the United States has historically relied on a system of private ordering with as little intervention from the federal government as possible. This scheme lies in stark contrast to the merger law of many other developed nations and, as such, has become a trademark of U.S. corporate law. Recent events, however, have brought into question the system's desirability in cross-border transactions where foreign entities are investing in U.S. assets. Proponents of reform argue that the federal government should become more involved in the approval process for these transactions given increased concerns of national security, while opponents argue that welcoming foreign investment is a hallmark of U.S. foreign policy not to be changed. This Note suggests a reform addressing both of these concerns in the hope that, when the next such transaction is called into question by U.S. politicians, the concerned parties will have a well-established legal doctrine to guide them.

TABLE OF CONTENTS

I. INTRODUCTION
II. COMPARATIVE LOOK AT THE STATUTORY
FRAMEWORK FOR MERGERS AND ACQUISITIONS
TRANSACTIONS IN THE UNITED STATES AND ABROAD
    A. Statutory Framework of Delaware General
    Corporate Law Concerning Mergers
    B. Statutory Framework of Foreign Law
    Concerning Mergers
III. CFIUS EXPANSION AND IMPLICATIONS FOR
DIRECTORS AND SHAREHOLDERS OF U.S.
CORPORATIONS
    A. What is CFIUS? A Brief History and
    Examination of the Mechanics Behind the
    CFIUS Review Process
    B. The Recent Movement for Expansion of
    the Scope of CFIUS Power
    C. The Implications of the Seemingly Imminent
    Expansion of CFIUS for Directors and
    Shareholders
IV. A PROPOSED REFORM TO U.S. MERGER LAW
IN THE CONTEXT OF CROSS-BORDER TRANSACTIONS
    A. Various Economic, Political, and Social Goals
    Should Not Be Compromised
    B. Revising CFIUS
    C. Revamping the CFIUS Process
    D. Proposed Change to Delaware Merger Statute
V. CONCLUSION

I. INTRODUCTION

On April 4, 2005, California-based oil and natural gas powerhouse Chevron Corporation (Chevron) announced its intention to acquire another California-based industry leader, Unocal Corporation (Unocal). (1) The deal obtained antitrust approval from the U.S. Federal Trade Commission, and negotiations were proceeding according to schedule until June 23, 2005, when China National Offshore Oil Corp. (CNOOC) announced an unsolicited $18.5 billion bid for Unocal, topping Chevron's bid by $2 billion. (2) At the time of the bid, China was experiencing an increased need for a secure energy supply as a result of its growing economy. (3) Moreover, as a result of China's trade surplus with the United States, foreign investment seemed to make good economic sense as a way for the Chinese to satiate this heightened need for energy supplies. (4)

Within hours of the announcement of the bid, however, concerned rumblings could be heard in Congress regarding national security issues arising from the possibility of a foreign company taking control of a U.S. company in the already tight energy market. (5) This apprehension was exacerbated by the fact that the CNOOC Ltd. entity was a subsidiary of a large, state-owned Chinese petroleum company, thereby adding fuel to the political fire. (6) The opposition in Congress took the form of several bills and resolutions that were introduced over the course of the summer. (7) The first such Congressional missive came in the form of a House Resolution, drafted by Representative Richard Pombo of California, voicing the concerns that had been discussed in Congress and calling for President Bush to conduct a thorough review of the proposed acquisition--if indeed Unocal and CNOOC were to enter into an agreement. (8) On the same day, June 30, 2005, the House also passed an amendment to an appropriations bill, which prohibited the use of Treasury funds for the purpose of gaining approval for the proposed transaction. (9)

In an effort to make assurances to stockholders and to quell the minor political uproar that followed CNOOC's bid, the directors of the Chinese company subsequently volunteered to undergo review by the Committee on Foreign Investments in the United States (CFIUS). CFIUS is a multi-agency panel comprised of twelve members, including representatives from the Department of Homeland Security and the Commerce Department, which assesses a deal's viability in terms of national security before making a recommendation to the President. (10) CNOOC's June 27, 2005 letter to the U.S. Congress aimed to "stress the key commitments that are an integral part" of the "friendly and open offer for Unocal." (11) After establishing CNOOC's willingness to participate in a CFIUS review, the letter went on to assure Congress that "substantially all of the oil and gas produced by Unocal in the U.S. will continue to be sold in the U.S. should a merger occur" and reiterated CNOOC's commitment to "retain[ing] the jobs of substantially all of Unocal's employees, including those in the U.S." (12) Because the foundation of political opposition to mergers is generally the risk of job loss, this move was aimed directly at alleviating the fears pervading the U.S. political scene. (13)